1. There are two countries. West East 1

2. In each country, there are 10 workers. West East 2

3. The workers make RED stuff and BLUE stuff. West East 3

4. The workers eat the RED stuff and BLUE stuff. West East 4

5. Happiness = (RED stuff eaten) (BLUE stuff eaten) 126 5

6. 0 0 6 F A I L

7. West 7 In West, workers can produce various quantities of RED stuff…

8. …or various quantities of BLUE stuff. 1 worker to Red and 9 workers to Blue 8 Production: 20 Red and 60 Blue West

9. 9 East In East, worker can also produce various quantities of RED stuff and BLUE stuff.

10. 10 West is a lesser developed country compared to East.

11. You must decide how many workers to allocate to the production of RED stuff and how many to allocate to the production of BLUE stuff. Your goal is to attain the most happiness possible for your country. 11

12. Example (using West): Suppose West chooses to assign 2 Workers to RED production and 8 Workers to BLUE production. 282857 28571,596 Production of RedProduction of BlueUnits of RedUnits of BlueUnits of RedUnits of Blue Labor Allocation (must total 10)ProductionImports (negative = exports) Units of RedUnits of Blue Consumption (production plus imports) Happiness (red consumed x blue consumed) 2 + 8 = 10

13. Example (using West): 916020 60201,200 Production of RedProduction of BlueUnits of RedUnits of BlueUnits of RedUnits of Blue Labor Allocation (must total 10)ProductionImports (negative = exports) Units of RedUnits of Blue Consumption (production plus imports) Happiness (red consumed x blue consumed) 9 + 1 = 10 Suppose West chooses to assign 9 Workers to RED production and 1 Worker to BLUE production.

14. Round 1: Autarky Allocate 10 workers to maximize your country’s happiness. 14 916020 60201,200 Production of RedProduction of BlueUnits of RedUnits of BlueUnits of RedUnits of Blue Labor Allocation (must total 10)ProductionImports (negative = exports) Units of RedUnits of Blue Consumption (production plus imports) Happiness (red consumed x blue consumed) 9 + 1 = 10

15. Round 1: Autarky Solution for East Solution for West 15

16. West East 16 Round 2: You may trade (if you want).

17. Example (using West): 192060 30551,650 Production of RedProduction of BlueUnits of RedUnits of BlueUnits of RedUnits of Blue Labor Allocation (must total 10)ProductionImports (negative = exports) Units of RedUnits of Blue Consumption (production plus imports) Happiness (red consumed x blue consumed) 10-5 Suppose West chooses to assign 1 Worker to RED production and 9 Workers to BLUE production. East agrees to trade West 10 RED for 5 BLUE.

18. Round 2: Trade Allocate 10 workers then trade (if you want) to maximize your country’s happiness. 18 192060 30551,650 Production of RedProduction of BlueUnits of RedUnits of BlueUnits of RedUnits of Blue Labor Allocation (must total 10)ProductionImports (negative = exports) Units of RedUnits of Blue Consumption (production plus imports) Happiness (red consumed x blue consumed) 1 + 9 = 10 10-5

19. Round 2: Trade Solution for East Solution for West 19 Price of Red 1 Red = 1.5 Blue

20. West has an absolute advantage in the production of RED stuff.  In West, 1 unit of RED costs 1/2 worker.  In East, 1 unit of RED costs 1 worker. East has an absolute advantage in the production of BLUE stuff.  In West, 1 unit of BLUE costs 1 worker.  In East, 1 unit of BLUE costs 1/2 worker. 20

21. What if West is a lesser developed country such that East has an absolute advantage in the production of both RED and BLUE? 21

22. In West, a single worker can produce 2 RED stuff or 1 BLUE stuff 22

23. In East, a single worker can produce 3 RED stuff or 6 BLUE stuff 23

24. Round 3: Autarky Allocate 10 workers to maximize happiness. 24

25. East has an absolute advantage in the production of RED stuff.  In West, 1 unit of RED costs 1/2 worker.  In East, 1 unit of RED costs 1/3 worker. East has an absolute advantage in the production of BLUE stuff.  In West, 1 unit of BLUE costs 1 worker.  In East, 1 unit of BLUE costs 1/6 worker. 25

26. Round 4: Trade Allocate 10 workers then trade (if you want) to maximize happiness. 26

27. Are we thinking about the problem correctly? When you choose to produce more RED stuff, what do you give up? When you choose to produce more BLUE stuff, what do you give up? A country doesn’t give up workers when it produces stuff. It gives up the other stuff it could be producing instead.  The opportunity cost of BLUE stuff isn’t a worker.  The opportunity cost of BLUE stuff is RED stuff! 27

28. How many RED stuff does West have to give up to produce 1 more unit of BLUE stuff?  In West, the cost of 1 BLUE stuff is 2 RED stuff. How many BLUE stuff does West have to give up to produce 1 more unit of RED stuff?  In West, the cost of 1 RED stuff is 1/2 of a BLUE stuff. 28

29. How many RED stuff does East have to give up to produce 1 more unit of BLUE stuff?  In East, the cost of 1 BLUE stuff is 1/2 RED stuff. How many BLUE stuff does East have to give up to produce 1 more unit of RED stuff?  In East, the cost of 1 RED stuff is 2 BLUE stuff. 29

30. West has a relative advantage in the production of RED stuff.  In West, 1 unit of RED costs 1/2 units of BLUE.  In East, 1 unit of RED costs 2 units of BLUE. WestEast East has a relative advantage in the production of BLUE stuff.  In West, 1 unit of BLUE costs 2 units of RED.  In East, 1 unit of BLUE costs 1/2 units of RED. WestEast 30

31. West has a relative advantage in the production of RED stuff.  In West, 1 unit of RED costs 1/2 units of BLUE.  In East, 1 unit of RED costs 2 units of BLUE. WestEast West will trade if West can sell 1 RED for more than 1/2 BLUE. East will trade if East can buy 1 RED for less than 2 BLUE. 31

32. West will trade if West can buy 1 BLUE for less than 2 RED. East will trade if East can sell 1 BLUE for more than 1/2 RED. East has a relative advantage in the production of BLUE stuff.  In West, 1 unit of BLUE costs 2 units of RED.  In East, 1 unit of BLUE costs 1/2 unit of RED. WestEast 32

33. 33

34. Conclusions: 1.Trade is a positive sum relationship. 2.Exchanging goods is what’s important. Money is only a tool that facilitates the exchanging. 3.Every country has a relative advantage in something. 4.Trade is the combination of exchange and specialization. Specialization is the directing of resources toward the countries relative advantage. 34

35. What Are the Benefits From Trade? Protectionist Assumption: Trade leads to a centralization of political power, decreased competition, and the transfer of wealth. Globalist Assumption: Trade leads to a decentralization of political power, increased competition, and the creation of wealth. 35

36. What Is the Impact on Per-Capita Income? Protectionist Assumption: Trade is exploitive of peoples and industries, therefore per- capita income will be lower for countries that trade more. Globalist Assumption: Trade is beneficial to both parties, therefore per-capita income will be higher for countries that trade more. 36

37. Per-Capita Income Luxembourg Belgium Ireland Netherlands Japan US Bahrain Source: International Financial Statistics, International Monetary Fund, December 2001 37

38. Per-Capita Income (Lower Middle, and Low Income) Suriname Lithuania Samoa Russia Colombia Peru Guyana Source: International Financial Statistics, International Monetary Fund, December 2001 38

39. Per-Capita Income Vietnam Workers in foreign-owned apparel and footwear factories rank in the top 20% of wage earners. Indonesia In 2000, Nike paid $720 annually compared with an average annual country-wide wage of $241. Mexico Firms that exported most or all of their product paid wages 60% higher than wages of non-exporting firms. Source:Brown, Drusilla K., Alan V. Deardorff, and Robert M. Stern, “The Effects of Multinational Production on Wages and Working Conditions in Developing Countries,” discussion paper no. 483, School of Public Policy, The University of Michigan, August 2002. 39

40. What Is the Impact on Income Distribution? Protectionist Assumption: Trade consolidates income in the hands of the powerful, therefore countries that trade more will have a less equitable income distribution. Globalist Assumption: Trade creates income across trading partners, therefore countries that trade more will have a more equitable income distribution. 40

41. Income Distribution US Switzerland Ireland Finland Cyprus Netherlands Singapore Hong Kong Norway Denmark Sweden Austria Canada Germany Israel France Slovenia Gabon South Africa Malaysia Source:International Financial Statistics, International Monetary Fund, December 2001, and Measuring Income Inequality: A New Database, Deininger, Klaus, and Lyn Squire, World Bank, 2002 No carrot:A too inequitable distribution signals a lack of entrepreneurial opportunity. No stick:A too equitable distribution signals no cost to free riders. 41

42. Income Distribution (Lower Middle, and Low Income) Thailand Lithuania Fiji Ukraine Source:International Financial Statistics, International Monetary Fund, December 2001, and Measuring Income Inequality: A New Database, Deininger, Klaus, and Lyn Squire, World Bank, 2002 42

43. What Is the Impact on Social Equality? Protectionist Assumption: Trade exploits the weak. Globalist Assumption: Trade empowers the weak. 43

44. Gender Related Development Index US Myanmar Oman Botswana Ivory Coast Azerbaijan and Albania GDI measures equality of quality of life (longevity, education, literacy, income). Source:International Financial Statistics, International Monetary Fund, December 2001, and World Development Indicators, World Bank, 2002 44

45. Gender Empowerment Measure GEM measures the proportion of women in legislatures, among senior officials, and holding technical and management positions as well as gender differences in income (as a proxy for economic power) Source:International Financial Statistics, International Monetary Fund, December 2001, and World Development Indicators, World Bank, 2002 45

46. Child Labor US Hong Kong Sierra Leone Burundi Gabon Botswana Source:International Financial Statistics, International Monetary Fund, December 2001, and World Development Indicators, World Bank, 2002 46

47. What Is the Impact on Unemployment? Protectionist Assumption: Trade destroys jobs. Globalist Assumption: Trade creates jobs. (beware of availability bias) 47

48. Unemployment vs. Trade Over Time Source: Bureau of Labor Statistics, and Bureau of Economic Analysis 48

49. Unemployment vs. Trade Over Time Source: Bureau of Labor Statistics, and Bureau of Economic Analysis 49

50. What About Fair Trade? 50

51. 51

52. What About Outsourcing? Protectionist Assumption: Outsourcing puts Americans out of work. Globalist Assumption: Outsourcing is trade (of labor), and trade is beneficial. 52

53. Source: Balance of Payment Statistics Yearbook, IMF 53

54. Source: Balance of Payment Statistics Yearbook, IMF 54

55. Source: Balance of Payment Statistics Yearbook, IMF 55

56. Name two metrics that distinguish the first world from the third world. 56

57. If you hit a light bulb with a hammer, will you make a mess? 57

60. Source: United Nations International Financial Statistics and Heritage Foundation 2.03.04.05.01.0 60

61. Source: United Nations International Financial Statistics and Heritage Foundation 61

62. Political freedom makes economic freedom possible. Economic freedom makes political freedom meaningful. 62